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For Apple 2012 started with almost the same growth as 2011 started. Q1 2011 saw earnings growth of 92% and Q1 2012 saw growth of 94%. As the following revenue growth table shows, the pattern for the last twelve months has been very consistent:

Here are some notes:

The iPad is growing at a faster rate than the iPhone and has achieved in two years what the iPhone took four.

The iPhone grew units at nearly 90% and revenues at 85%. This is slightly below the quarterly average over the last two years of 99%

The Mac showed significant weakness though the previous year’s Q1 had exceptionally high growth of 32%. The Mac still grew faster than the market and therefore gained share

The iPod is declining consistently. Units showed a lesser decline than revenues as the average price dropped from $164 to $157.

The iTunes store continues to grow very rapidly, reaching a new record level above $2.1 billion revenues

Peripherals were weak with 11% growth but that may have something to do with lowered Mac sales

Software had good quarter though not exceptional

The top line grew at nearly 60% which is not exceptional but the bottom line grew at 94% which is above average

Overall, the company had a very good quarter and showed consistency, which, incidentally, implies predictability. The following graph shows the top and bottom lines in historical context with color coding matching the table above.

How does one describe it when disruption becomes consistent and predictable?

Luis Alejandro Masanti

Very good question!
Or, maybe, we must consider this a case of “continuous disruption”?

warbux

according to clayton christensen (author of the innovator’s dilemma), all disruption is consistent and predictable. you may not always know the players, but the forces are immutable.

http://twitter.com/dr_stupid anna boros

Is this still disruption, or is this status quo waiting to be disrupted? How long will Apple be one step ahead? And who has the power to disrupt?

http://www.asymco.com Horace Dediu

Apple does. It disrupts itself regularly, presumably because it knows that if it doesn’t someone else will.

http://twitter.com/dr_stupid anna boros

That may be true for hardware, but I don’t see that in software. They’re partly protecting their ecosystem by controlling the AppStore content. But happens if someone, let’s say Facebook, comes with a successful independent app layer?

Space Gorilla

I don’t think a competitor can simply walk in and create an independent app layer. The underlying framework and ecosystem took Apple many years to create. There’s no shortcut for a competitor. Horace can likely articulate this better than I have. And perhaps I’m wrong.

And there’s also jailbreaking. It could be illegal now, but changing that is a question of lobby.

http://twitter.com/PaulMaxime Paul Franceus

Jailbreaking doesn’t matter. Apple doesn’t make much money off of App sales. An app installed by jailbreaking is still an app written specifically for the iPhone.

Apple explicitly supports web apps, including installing the icon on the home screen, so this doesn’t disintermediate the iPhone either.

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

Whatever gave you the idea that jail breaking was illegal? You are misinformed.

I don’t think Facebook is in a position to disrupt Apple. They’re scrambling defensively to deal with mobile. Note the acquisition of Instagram.

If we do see an external disruptor of Apple’s business, I would guess that it would seemingly come out of nowhere and take us by surprise, much like Apple did when it disrupted the mobile phone business.

TheEternalEmperor

Won’t happen. Browser apps still don’t have the flexibility, performance or power of native and cross-platform always amounts to degraded experiences across the platforms.

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

Always? I think your points are valid, but always means . . . a long time. I guess that’s why you’re called The Eternal Emperor.

http://www.asymco.com Horace Dediu

HTML 5 or the iOS APIs are hired by developers to solve the job of enabling experiences that are competitive and compelling. HTML5 is not yet good enough but even if it were it would need to compete in a way that native APIs would find it unattractive to compete in similar ways. In other words, HTML5 needs asymmetry which avoids a response in kind from native. I don’t yet see this asymmetry.

Walt French

The ***promise*** of HTML is the same as java’s was: write once, run everywhere. For lower-touch front-ends to data, and for many more sophisticated uses, that’s a huge cost-saver for developers.

It comes with the same penalties as java: difficulty of getting a decent native look & feel, and sometimes-sluggish performance. But it will continue to improve (in no small part due to heavy efforts at Google) and will always be important for a corner of the app market.

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

OK, I think I got it.

And “openness” as a feature doesn’t provide much asymmetric leverage, or at least not yet. Is this more or less right?

Also, is see Walt’s point about the promise of Write Once, Run Everywhere as being unfulfilled at present.

Walt French

I get that Facebook is in a bind about moving their usage into an iOS app. If they subject all their games’ virtual weapons, etc., to both Apple’s 30% and their own (similar?) fees, developers only get 51%, which changes the economics sharply. Zynga would go straight to Apple.

That’s a business problem, all right: Facebook’s situation is as if say, Sears.Com wanted its own app that had to pay a 30% markup to Apple. Prices would simply be uncompetitive.

But it’s not that different from Google’s problem: they don’t really have a good way to monetize mobile, either, even without the double layer. The user associates the value-add with the handset, maybe with the OS. Facebook isn’t really adding any value to a game written by a third party, provisioned over an anonymous carrier and played on an iPhone, maybe with friends who users knew before Facebook existed.

So Facebook wants to offer its own phone, maybe built like WebOS atop HTML, to bypass the Apple tax. I suspect Zuckerberg is way too clever to pour money down THAT rathole.

What he MIGHT be tempted to do, however, would be to offer a Facebook-branded WinPhone built by HTC, Sammy or Nokia. Microsoft would be happy to have a few million US users that Facebook might be willing to commit to. It still leaves the majority of smartphone users outside the Facebook ecosystem, however.

And the idea recalls the reported meeting between Jobs and some hapless ESPN exec who walked up to shake his hand at a Disney meeting. Jobs’ gratuitous and obscene insult to the exec’s intelligence for burning $200 million (?) on an utter failure of an ESPN-branded feature phone is likely to discourage others from going that route.

People say that Apple doesn’t “get” social. The fact that they haven’t gotten suckered into being distracted by Facebook’s lack of a business plan for mobile suggests quite the opposite.

http://wmilliken.livejournal.com/ Walter Milliken

An independent app layer wouldn’t be anything new — Java, Javascript, and Flash in web browsers are probably the best-known examples. There are numerous problems with device-agnostic application layers that have limited their adoption; they seem to get the most traction in conjunction with shared services in the cloud, and in Flash’s case, casual games with undemanding performance requirements.

The rapid growth of Apple’s app store after it opened, versus the very limited set of web-based apps available in the first year of the iPhone’s history — when Apple was encouraging developers to create applications that way — strongly suggests there’s something fundamentally better about resident native applications, at least for now, and possibly indefinitely.

Native apps have performance advantages, and at least on iOS, UI and device consistency advantages, over cross-platform apps that have to deal with everything out there. Just look at all the issues in cross-platform, cross-browser web development. It can be done, but it’s painful.

Maybe someday someone will manage a true cross-platform convergence layer for applications, but so far, all efforts have fallen short of what’s really needed.

I think Facebook apps will continue to succeed *while people are on Facebook anyway*, but I wouldn’t count on that platform going much farther. And Facebook doesn’t really have an interest in that — they want you to spend your entire life there.

http://twitter.com/qazwart David Weintraub

We should remember “App Store Version 1.0″ when Steve Jobs announced that you could create your iPhone apps by using JavaScript. That didn’t go over very well. Six months later, Apple changed its tune, and announced an SDK and the App Store.

Despite all the pundits stating otherwise, people like native apps, and as we can see from the App Store, there are a lot of native apps that simply do the same as a particular website. For example, Dropbox has a website that reformats itself for the iPhone, yet they still built an iPhone/iPod app.

And controlling the app store content is actually a new idea. Before, you found your apps where you could and installed them yourself. The App Store walled garden approach has over a half million apps in it. In other words, the strong control over the App Store hasn’t hurt the number of people who want apps. And, it has kept out the malware, cloned stolen apps, and other issues that Android has. Microsoft looked at both iOS’s and Android’s approaches, and decided to emulate iOS.

Under Jobs, Apple has been very innovative and destructive. There’s Mac OS X replacing System 9. There’s i86 replacing the PowerPC architecture. There’s also Mac.me and iWeb replaced by iCloud (if you want to talk about software).

And, don’t forget how iOS is a disruptive technology over the Mac. Microsoft created a Windows tablet OS in order not to destroy the desktop market. Apple had no qualms about creating a new computing environment that may one day make the Mac an obsolete machine.

Apple has no qualms about disrupting their own bread and butter systems whether software or hardware. And, they do this no matter what the pundits say, what their customers say, or what most business analysts say. As I told a friend of mine, Microsoft is still competing against Apple Computer and not Apple, Inc.

TheEternalEmperor

Are you kidding? iOS, iTunes, the App store, iCloud are all disruptions that no other company has yet matched.

No one is even close to putting together all these pieces, let alone, putting them together as well as Apple.

How does one describe it when disruption becomes consistent and predictable?

Lee

Appleization of the competition.

newtonrj

A Monopoly

-RJ

http://kaizenity.blogspot.com/ FalKirk

A monopoly is the antithesis of disruption.

newtonrj

In many ways, AAPL acts like a monopoly. Profit Maximizer, Price dictator, High barriers to entry, Economies of scale, No technical substitute (iTunes/AppStore), Legal barriers (IP) to entry, Network effects to use (Halo and trendy).

However, my comment was mostly a jest as AAPL doesn’t abuse its power, seeks continual improvements, keeps manufacuring costs lean, and has caused the market to move to their product price/cost rather than compete at previous cost/price lines.

-RJ

r.d

just like when bankers said risk could be spread so they could take it off their books.
Really these market buzzwords does no one any service.

Luis Alejandro Masanti

What about the guidance that next quarter will be “less expectacular” than last years?

http://www.asymco.com Horace Dediu

I’ve never used guidance as a data point in any of my analysis. I consider the primary purpose of guidance to be the protection of management from shareholder lawsuits.

WFA67

Do you think this also why the professional Apple analysts consistently lowball earnings estimates? If so, what value do they add?

Frankly, I’d rather watch Horace, Andy, Robert and others from the ‘Sanity’ crew on Bloomberg/MSNBC than listen to pros whose accuracy I would call a “Market Underperform.”

obarthelemy

I guess consistency implies predictability the same way that interpolation validates extrapolation ?

http://www.asymco.com Horace Dediu

Depends on the system.

obarthelemy

indeed. how/why doe it apply here ?

http://www.asymco.com Horace Dediu

The smartphone/computing market is not memoryless. It depends heavily on installed base and ecosystems. Memory is the essence of the network effect. Consistency of performance for a platform does indicate future performance.

Jeff Silverman

The guidance given and the color given by Tim and Peter lend themselves to a new iPhone launch in June. The quarter ends in June; if apple announces an iPhone event in June; announcements are usually 1-2 weeks before the event- – some people will hold off; leading to the same situation we had in 3rd qtr of 2011 where we ignored guidance; I agree with Horace about guidance in general but we do need to be on the watch what happened in past; imagine a free (with contract) iPhone 4 or iphone4s and an iphone5; last point with this quarter where the US was 21% of iPhone sales; (and 60% of cell phones- not just smart phones at ATT)- we can start to see (easily) a 30% world wide share of the 1.5 billion cell phones sold; 450 million iPhones at a profit per phone to apple of $300- WOW

Sacto_Joe

I would be frankly shocked if they moved the iPhone release date back to June. Leaving it where it is makes all kinds of sense. Perhaps most importantly, you make it basically impossible to drive a “wedge” between the holiday season buyer and your major money product (the iPhone) by coming out with something “better” in that extra three month gap. Also, you build maximum momentum for your new phone, and momentum is everything. There are probably others but those are the two that come to mind right off the top of my head.

matthewwanderer

I agree your logic behind a Fall update cycle for the iPhone.

I’d simply add that there’s 6-month spread between the existing early-Spring iPad refresh cycle and an early-Fall iPhone refresh cycle. I can see all kinds of reporting reasons, in addition to competitive reasons, to balance Apple’s two major earners in this way.

Name99

Look at the crazy demand for phone companion watches, as evidenced by the Kickstarter Pebble project and how much money it picked up in just few days.

I predict that soon enough that iPod negative number will turn positive as Apple releases such a watch without the most conspicuous limitations of the existing offerings (most obviously that it be waterproof, or at least water resistant enough for bathing and swimming; and that it absorb power from human motion so doesn’t have to be recharged, rather than the current recharging every 4 days [sony] or 7 days [pebble])

Sacto_Joe

I was given an “iWatch” for Christmas. Love it. But it definitely has more potential than what they’ve built in. Yeah, I saw the Pebble. I’m not all that impressed. They’ve got a LONG way to go to match Apple’s polish, even in its present incomplete state. And I guarantee you Apple’s been aware of this a lot longer than either of us. Pebble’s just trying to steal Apple’s thunder, but that’s fine. More power to them if they can actually pull something off.

kankerot

The Iphone subsidy is maintaing Iphone sale as it is distorting the real clearing price of the Iphone.

Ipad and mac margins are better reflection of Apple long term Iphone margins as both these products are not effected by subsidy pricing models.

The operators should just end subsidies and let consumers decide if they can pay.

http://www.asymco.com Horace Dediu

The iPhone is a salesman hired by the network operator to sell mobile broadband service. He gets a healthy commission because he’s very good at it.

Glimmerman

Well said!

kankerot

Interesting analogy. If he was that good how is it that in countries where there is no big subsidy he is not as good. Sales in countries like Spain and Greece are not at the same percentage as in the US.

You have fit a theory around observations rather than fact.

The Iphone is subsidised more than other phones. If someone was selling me a Ferrari at Porsche prices – would that mean the Ferraris salesman is better? No.

Would I buy my electronics from my utility supplier in return for higher electricity prices? No but you do with wireless in the US due to their massive buying power and control.

If you look at the proportion of Iphone sales to other smartphones in countries where there is no subsidy and where you can choose your sim and provider separate to your phone you see Iphone is not the great salesman you make him out.

The US market is perverse. The quicker the operators separate their charges from subsidy and let owners buy their phones will actually benefit the operators. The argument that the operators under this scenario will quickly become dumb pipes is as weak as the idea that oil is a homogenous product which would entail the big oil concerns to compete away profits.

Accent_Sweden

Spain and Greece are hardly examples you want to use considering they are both in economic meltdown. They don’t represent anything but their own market conditions. Better would be to highlight other countries more in economic sync with the US economy. Try the UK, Sweden, Germany. These would support your argument more.

Even in these other countries, though, the iPhone still is doing a heck of sales job. Less churn, more usage, higher satisfaction with the network among customers. European providers can’t shake the iPhone fix for a reason.

kankerot

The reason I chose Spain and Greeces was to compare it to a model where the subsidy model is not dominant. Then you get a better idea of what sales will be.

As to the UK it has the subsidy model but not on perverse nature of the US model.

The facts are straight forward no matter how great a salesman you see the Iphone as the subsidy model distorts its price and thus demand.

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

Your grasp is exceeding your reach. Spain and Greece? Why not use North Korea as an example of where iPhone sales have been sluggish?

Your Ferrari/Porsche analogy demonstrates a lack of understanding of the business model in play here.

Comparing mobile carriers with an electrical utility, in this instance, is silly.

Kankerot, you generally perform a valuable service as the house contrarian. Bit this post was more rot than kanke! I suggest it is you that is trying to bend reality to your desires. You see carrier subsidies as undesirable, therefore any profits Apple makes from carrier subsidies are invalid. Or am I misunderstanding your thrust?

kankerot

Spain and Greece, you can add other coutries that dont have the ridiculous subsidy model Iphne sales are not in the order of magnitude of the USA.

The ferrari/Porsche model is lakcing how? Either explain why?

Why is it silly comparing a utility provider and wireless carrier?

I see carrier subsidy as a pathetic attempt by the carriers to maintain their high prices. As to how you jumped to Apple profits being invalid shows how poor your thinking is on this.

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

Ferrari and Porsche are not in the service providing business. Your analogy makes no sense. The carriers subsidize phones to sell more service to the customer.

Maybe this is different where you live, but in all places that I have lived, there are not multiple electric companies competing for users. You either “subscribe” to the local power company or you go off the grid and provide your own. (There are hybrid schemes that involve generating your own power during the day, selling it to the power company, then buying it back at night, but that’s outside the scope of this discussion).

If there *were* competing power companies, perhaps there would be a business model for subsidizing appliances for two year contracts. As things stand, electric companies already have consumer lock in.

Tatil

Actually, power companies in the US subsidized appliances to increase electricity consumption for decades. Electric irons for example… I suppose they were cheap, more convenient than the kinds with coal in them and they used quite a bit of electricity to heat up. Even despite lack of competition, wireless operators could decide to subsidize devices that use up cellular data. Actually, I believe unlimited data plans, some at very low monthly charges, came out during the time when operators had loads of data capacity, but very little customer demand. I doubt they offered those plans to compete against their competitors.

kankerot

It’s not about whether it is in the service business or not its simply how prices are effected by subsidy and how that effects demand.

Its pretty clear on here that most are not ground in economics and substiutes/compliments and cross elasticities of demand.

Horace can word as nice as he likes but the analogy is weak.

If there was no subsidy are you saying Apple margins and sales on the Iphone would remain as they are? Simple yes or no.

As to electricty companies subsidising goods – you really now are clutching at sraws trying to justify your stand.

In the UK there are multiple suppliers for electricty and gas.

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

Your Ferrari analogy lacks a middle man making the subsidy and selling the Ferrari at a reduced price. Apple is not reducing its price, it gets the same price regardless whether it sells to the carrier or the end user. The reason the carriers act as middle men and make that subsidy is because the iPhone performs a job for them: it sells 2 year contracts with low churn. I suspect you are shifting your argument here.

Second question: I’ll break it into two questions, rather than give you a simple yes or no. Would IPhone’s adoption rate be as great without subsidies? Possible no, but then neither would Android’s. Next part: Would Apple’s margins be the same? On per phone basis, yes.

Regarding electric companies subsidizing appliances, apparently they have in the past. See Tatil’s comment.

I didn’t know that about the UK having multiple “carriers”, which is why I used the phrasing that I did. Do the competing carriers use the same infrastructure? On what basis do they compete? How do they differentiate?

I’m not taking a stand, I’m just trying to understand your argument. Please think of me trying to help you refine your arguments rather than as an attack.

kankerot

Marcos – no offence taken. Thanks for keeping it civil.

As to your points. In the UK car makers will sell to car dealers who are independents – they will sell a car at a loss or discount to make it back up on servicing revenues where the profits are for the dealers. So the car dealer is the middleman.

Iphone adoption or that of other expensive unsubsided smartphoens would be less – thats pretty mucha given.

I dont disgaree Apple will likely sell at the same margins but at reduced volumes. The Iphone is a normal product and its quanityt demanded is inversley dependent on its price – ceteris paribus.

Uk carriers use the same infrastructure, they compete on price and service, payment options, metering options.

http://profiles.yahoo.com/u/IWQ7HIPZ4UJ5YWJB7JSYZ7QXKM watchdog

In other countries where phones are not subsidized, the iPhone does not help to sell a 2-year mobile broadband service, since one can buy an iPhone and activate on any one of multiple compatible cellular services.

In that case, iPhone is just one of many salesmen for smartphones (relative to feature phones). In addition, it allows consumers who’ve decided to get a smartphone, to put a value on the top end of the smartphone market so that they can judge the relative value of other competing smartphones.

It’s not clear yet that operators would benefit from not having subsidies. With a high initial phone price, consumers may opt to revert to featurephones and no data plans, thus, lower ARPU. And those who do buy smartphones might switch operators on a much more frequent basis, i.e., increased uncertainty and marketing costs. Do you have a pointer to a study that would show what you’re asserting?

Walt French

It’s not clear yet that operators would benefit from not having subsidies.”
Let me call this the elephant in the room that goes surprisingly unrecognized. The carriers know their businesses better than we do. They are constantly looking at why new customers come and go, costs of servicing, etc.

And none of the US carriers who carry iPhones have a subsidy-free data+voice option. T-Mo does, but of course its frequencies are incompatible with the iPhone’s 3G, so it’s moot.

Cook may have overstated Apple’s case yesterday, when he said that customers come to the carriers to buy iPhones, but the logic (and Horace’s pithy quip) is spot on: we’ll see unsubsidized plans only when carriers want to attract people who already own a good-enough phone. Take Apple’s incredible margins plus a little bit of love from Moore’s Law, and you see that Apple has wonderful economics in favor of continuing to jam more features—hardware, software & Siri-type services—into new models.

kankerot

So if there are no more unsubsidsed Iphones the only way for them to maintain their sales is for them to jam more hardware into the device at the cost of margins.

The sooner carriers around the world end the subsidy model the better for consumers and then you will see the effects of a real market clearing price for the iphone and other smartphones.

Juven

If the carriers stop subsidizing phones, then how will they convince customers to sign up for multi-year service contracts? If the customers can switch carriers at any time, then the carriers will be forced to compete based on the service price. This might be good for customers, but this is not what the carriers want. It would hurt their margins.

In the worst case (hyper-competitive) scenario for the carriers, the cell phone market will be like the market in India where users carry multiple prepaid SIM cards and switch SIMs multiple times per day depending on who is offering the best pricing that hour. Carrier margins would become razor thin, to the point that they would slow down investments in new network technologies.

Offering customers the latest phones is the way that the carriers can avoid having to compete on price. The more attractive a phone is to customers, the less pressure there is on the carrier’s service margins. Even if they have to take an initial hit on margins to hook their customers with a phone, they’ll make it up in a couple of months, with plenty of time remaining on the service contract to get some fat margins.

Z Kariv

I think that while we all want cheaper phones and services, we are overlooking something. The carriers are the ones that are installing more, AND BETTER, services–2G >>> 3G >>>4G speed and quality of reception. Why should they do it without the 2 year contract? and how? Whose money?

kankerot

I dont have a 2 year contract with my local petrol station or BP why are they investing in new technology. The list goes on.

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

Energy companies based on fossil fuel are supply constrained. They must develop new supplies when demand is high. Thus boom and bust cycles in certain economies such as Texas. When gas prices are high, there’s a lot of work in the oil fields and more investment. When prices drop, less investment and fewer jobs. Price is determined by supply and demand.

Mobile carriers haven faced cyclic pressure in this way, although one could also say they are demand constrained (there is a finite amount of usable spectrum). However, investment in telecom/Internet infrastructure has slackened at times because of infrastructure being overbuilt. Carriers do seem to time their investments in infrastructure to match demand for their services.

kankerot

Why should we be signed into multi-year contract?. Oil is a homegenous product and is prefectly substitutable yet we have competiton in the market from production, distribution and supply.

So your argument that we need to pay high prices to maintain investment is warped as you are simply trying to argue the current model works because it works for smartpone vendors and the end of subsidy would effect the sales of smartphones.

If there is a market for phones as there is a market for cars separate from the market for oil we can then see more innovation and the real clearing price. Hey if this subsidised model is so great then why hasnt the major oil concerns bought car makers and provided people with a package of car and oil?

If there was no subsidy and carriers would compete on service levels and customer service with the subsidy going towards lower prices and greater investment.

Walt French

Some day, maybe in a couple of years, the US market will be substantially saturated with smartphones—most Americans will have one.

Carriers will have to compete on price. It’s hard to see how they’ll compete on differentiated access to the internet; they’re already doing very little to compete on voice services such as customized voicemail messages, or specs for smartphones to choose between say, “Straight to Voicemail” “Ask Caller to Hold” or “Tell caller I’ll callback soon,” so why will they be able to compete on data quality? Still, I welcome that day. If you won’t raise quality, cut prices.

Phones will also compete on services and price. Mostly on services, methinks, because there is so much that can be done, in a way that swamps costs for all but the most impoverished. Yes, that means more h/w, s/w, which people will pay for if it meets their needs.

Already with Siri (which, btw, I don’t have), I can have it schedule my next haircut appointment as I’m walking out of the shop, for less than a penny of data, versus stopping, tapping for 30 seconds, etc.— many dollars/year of my time saved if I use those services much.

I think your literal analysis is all right, except that I sense a “glass mostly empty” tone, whereas I’d wager the competition is more on capability, not cost-cutting against last-year’s capabilities.

kankerot

If there is a separate market for wireless services and smartphones then it will be the capability of each market participant that matters.

As you mention in wireless services its either cut price or raise service levels, features etc.

In the market for smartphones – I agree the spec war will level out and it will turn to value added services available on that platform/ecosystem etc.

With a separate market for smartphones this will lower entry costs because entrants will be selling directly to consumers rather than be involved in negotiations with carriers.

So you will lower barriers to entry and raise the possibility of external entrants to disrupt the market this will lead to incumbants having to adapt or die.

Now as horace argues if Apple is as great an innovator as they are if this race becomes one of innovate or die are they not the best positioned to do so?

I find it perverse that so many argue for carrier subsidies as a model that is beneficial.

Walt French

With you about 95%. The exception: if our forecasts come true and devices compete on ecosystems, it will NOT become easier for an innovator to break in.

Carriers now have a strong incentive to play handset mfrs against one another — they’ve done it for years; they talked about doing it with Microsoft again just this week; it keeps the balance of power with them in a monopsony position. They are happy to bring in no-name producers to compete. But they’re losing control of the ability to bring in new handsets.

If this becomes a 2-horse race between Apple and Samsung (with either a forked Android or similarly-skinned Bada), it’ll become very difficult — very time-consuming and initially very unprofitable to set up a media store, for example — to break in. Microsoft is already seeing the trouble of getting all but the most well-financed app developers on board, and once you go to niche apps or apps (esp games) with a very short half-life, the WP catalog gets extremely empty.

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

Based on what I’ve heard (not first hand experience) Bada will take so much work to be made competitive with Android or iOS as to be not worth the time and expense. So much likelier that Samsung will do an Android fork if they do anything along these lines. What are you hearing?

By the way, Walt, are you on twitter? Do you tweet much? Do you have your own website? I’ve noticed that wherever there is an interesting conversation on mobile topics, your usually in the thick of it! I liked the pushback you gave recently to a Groklaw fan who was attacking a blogger of IP issues.

Walt French

I haven’t really looked into Bada, but think that Samsung needs an alternative to Google that its announced deal with Microsoft won’t give them. An Android fork would indeed make excellent sense, but I suspect that the Microsoft deal encourages them to get off Android eventually, so they must be putting some energy into their own brand, somehow. A recent piece on Google’s work suggests it’s not too hard to have multiple user-facing OS’s atop the linux that supports Android; that could allow them to start with a fork, then build out apps that’d be free of any licensing issues. However, it could adopt the bada brand.

I’m happy to comment on others’ pages when I have the time. WaltBook.Com languishes almost utterly unused. You can be the 42nd follower of WaltFrench on twitter if you hurry! I mostly use it to follow up on others’ posts, too.
I have to say: of the sites I follow regularly, this one is predictably the most thought-provoking, and any clever things I say probably started because Horace tickled my thinking bone. My work doesn’t need me to know the details, but the theme of why Apple is killing it in mobile is just perfectly suited to my interests. Kudos again to Horace!

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

I wouldn’t argue that carrier subsidies are completely beneficial for the consumer. In the short term, yes. They make it more possible for the consumer to get their hands on expensive equipment they might not be able to afford. Long term, no. It “enserfs” (rather than enslaves, which is too extreme a term, IMO) the consumer.

However, the subsidy model clearly benefits the carriers, which is why it is not going away. It has also been accepted by the consumer, who does benefit in the short term from the cheaper handset prices. That this benefit is illusory in the longer run is beside the point. Rent-to-own furniture and appliance stores benefit the vendor more than the customer because the customer ends up paying much higher prices, but the rent-to-own stores don’t seem to have a problem finding customers. Isn’t the subsidy model just a rent-to-own schem with a different name?

A few years back, I had a mobile phone required by, and reimbursed by an employer. My position was eliminated, and the employer paid off my early termination fee and let me have the inactive phone. Several years later I went to the same carrier to see about getting service for that phone. The price for service for that phone I owned was the same as getting 2 year contract with a new “free” phone.

US carriers are all about lock-in to long term contracts. Subsidized handsets are just a sales tool to that end.

kevin

There are operators that offer prepaid accounts, such as Straightalk, but they are smaller and the savings per month aren’t attractive for family plans to make up for the cost of multiple unsubsidized iPhones.

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

Most, if not all of the Indy prepaid carriers are leasing spectrum/services from the bigger carriers. Some of them are using a modified subsidy model to lock in customers! For example, Tracfone sells feature phones below cost, but the phones are locked to Tracfone with no easy way to unlock. (Tracfone is my US provider.)

Here in Mexico, my provider is Telcel. I just got an awesome deal on a Nokia Symbian phone! My first smart phone! (Yes, I am quite behind the times. In my defense, I use an iPad as my computer replacement.) Anyway, the Nokia is NOT locked, but Telcel has other strategies to lessen churn or maximize ARPU. (Am I using ARPU correctly? I mean to say the profit they make per phone sold.)

Henault_claude

Lets take an example from life. In Canada I can buy an iPhone unlocked from Apple, and use it on any carrier without being locked in. If I buy from the carrier I am locked in for three (not two, but three) years. The carriers will charge exactly the same phone and data rates for my unlocked phone as for my subscription phone. In other words, I pay a higher initial price for the iPhone, yet pay the same rates, so the carriers penalise by refusal to get a subsidy from them. Ergo, in practice, Canadian carriers all prefer the subsidy, which by definition argues it is to their advantage. I don’t see why the situation would be any different in the U.S.

http://www.asymco.com Horace Dediu

In countries where there are no subsidies the iPhone is not hired by operators. He is hired by the consumer directly. The consumer has a completely different job to be done and the way he is paid is different (though his take-home pay ends up the same). Fortunately, the iPhone is handy at more than one job.

kankerot

His take up pay ends up the SAME if he sells in the same volumes and margins. To say that will happen in an unsubsidised market is wrong. Facts alone speak for themselves when the Iphone is not subsidised its sales are not on the level seen in the USA.

http://www.asymco.com Horace Dediu

The pay I refer to is the revenue Apple collects per phone. In the analogy the individual is a phone, his pay is what is paid to own the phone. That price is the same globally regardless of distribution method.

kankerot

If you read what I wrote I do not disagree that apple would receive the same regardless if it is an indivdual or network paying for the device but I said would Apple receive the same volumes in an unsubsidised market? yes or no

http://www.asymco.com Horace Dediu

I believe they would receive more volumes at lower prices. The price as currently set accounts for the ARPU uplift it generates. If there is no ARPU uplift to be had then Apple could reduce prices and sell direct as they do for all their other products. Moving billions of people to mobile broadband is a hugely profitable business. If they are all already there then the business changes to keeping them from switching providers and selling services over the top. Perhaps not as wildly profitable but potentially very profitable.

kankerot

So they would not receive the same volumes at current prices. It’s quite simple to accept yet so many seem to deny it and then try to argue the subsidy model is great for consumers.

Lower prices to raise volumes – is that the Apple way? Currently they only lower prices when the latest verison is about to be released otherwise their prices remain unchanged.
Wouldn’t their fans turn their nose up at that. Their response to Instagram opening up to Android spoke volumes of the mindset.

Z Kariv

Perhaps you can provid some numbers to support your idea: IphoneS (or 4) Vs. Samsung Galaxsi III or any individual product of any individual company (meaning not all Droid wrap in one number)

ChKen

So, you’ve described the iPad market. How’s that going?

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

Terrible! Apple barely eked out 67 million units sold in two years. Apple is doomed!

https://twitter.com/#!/reda_ek Reda

I know I’ll be in the minority group here but I agree with kankerot that subsidies are distorting the picture… The salesman quote is a catchy quote but it’s not correct. Network operators are quite aware that the iPhone and smartphones in generals are devices that take away revenue from their “ecosystem” (appstores, whatsapp, etc) so would not be very keen in selling it. They do it because it’s the hottest device out there and if you don’t sell it (and not feed the demand) you are completely mad (and someone else will sell it anyway).

http://twitter.com/Marcos_El_Malo Marcos_El_Malo

So how is that distorting the picture? This is reality.

I don’t think subsidies are good for the consumer in the long run, but really that argument is for a different post or, really, a different website. Carrier subsidies are a fact in many markets and despite carrier grumbling about Apple’s share of the overall profits, subsidies are not going away. If anything, we’ll probably see the practice increase.

Walt French

I think this will be an increasingly important story, if not exactly as you foresee.

Verizon had a HUGE incentive to create/promote Droids; see the April 2011 Wired article about how they think it was as much their effort as Moto’s or Google’s. Today, they’re making friendly noises about Microsoft, but don’t care very much beyond the direct financials.

Once the carriers lose the subsidy lock-ins, they also lose 100% of their app stores’ revenues. They become the dreaded Dumb Pipes.

Different brand phones then compete on ordinary features and price. NOT on whether only Droids can tether; NOT on whether only Droids can work on Verizon; NOT on whether Androids are the only smartphone of note on T-Mobile/US; NOT on whether Google rebates ad and app revenue to carriers to push Androids; NOT on Microsoft spiffs to push their products. These were the features that drove Android to its current status, and will all be absent. (I presume that BlackBerry, and possibly your current employer Nokia, are also gone or bit players by then.)

This’ll be different for tablets, but for phone users, the question will be quality voice features (think the iPhone’s visual voicemail and multiply by ten); purpose-optimized apps (html or native, I don’t care); an integrated media ecosystem; ways to tie together various social nets; ease of use, customer service, upgrades; etc. Oh yes, and price.

Today, Apple is winning on the features and services side and with them making enough money to more than justify further development, you can look for them to keep pushing hard. @Kankerot is unhappy that this implies tail-fin-type built-in obsolescence, and I am not happy with the implied monopoly. But I think that’s the way to bet.

Shameer Mulji

”
They become the dreaded Dumb Pipes.”

I cherish the day when that happens to carriers. That’s where they belong. The real innovation right now, lies in software, services, supply chain.

https://twitter.com/#!/reda_ek Reda

The irony is that they are subsidising what they shouldn’t (iPhones) and not what they should (iPads) because in reality they are not part of the latter ecosystem (but if I were them I would do my utmost to “imprint” tablet = mobility)…

http://www.asymco.com Horace Dediu

If smartphones in general take revenue away then they are the sweetest poison ever devised.

https://twitter.com/#!/reda_ek Reda

true

http://ceklog.kindel.com Charlie Kindel

Horace, the iPhone requires a MO. It’s a phone that is basically useless without service. It’s a great salesman for the operator.

The iPad can *optionally* be bundled with service. The iPad is less of a salesman for the operator.

Question: How do you see this affecting Apple’s gross margins over time as tablets become a larger % of Apple’s volume?

http://www.asymco.com Horace Dediu

Yes. If the iPad/iPod/iTV? grow more rapidly than the iPhone then the gross margin is likely to decline.

Walt French

Charlie, Cook essentially said that people choose an iPhone and then decide which carrier to use; the carrier matters much less than the device. I think that’s an exaggeration, but “useless without service” is also, since service is essentially ubiquitous (the CDMA/GSM nonsense notwithstanding). I’ll guess that the OS-specific app marketplace has come up to roughly equal value with the carrier. The very function-optimized apps will likely continue to expand in terms of consumers’ perceptions of value, while the carriers shrink. (Although carrier revenues look rosy until growth has to come via cost-cutting.)

Likewise, you choose what tablet you want and then decide how you will connect it; likewise that’s an exaggeration, too. Here, you plug it into a dedicated ecosystem: Amazon (best contender so far), Android (non-existent), Apple (today’s clear leader), and Win8, the wanna-be challenger in the wings. Even more than with phones, I see the tablet ecosystems — cloud/sharing/backup, media, intra-socialnets — as important parts of the value stack, and Microsoft has an opportunity if they move much more aggressively than I have seen them do so far.

For most users, iPads have the crown on hardware quality, software depth, multi-generational app refinement, connectivity (operator sales w/ 3G and LTE) and channel. Amazon is a strong contender on media; Microsoft *could* contend on cloud and productivity.

So I think margins will fluctuate in light of the competition for the entire value stack that each brand presents, and how well competitors attack each. I would look at how effectively Amazon can mix its own cloud/media into the value stack, how much Samsung shows up with its own mix of media, apps and services (available across Android, Win8 and Bada), and whether Microsoft can leverage the Enterprise into the stack. Those should determine Apple’s margins in the coming years.

Iain

Walt,

“I think that’s an exaggeration, but “useless without service” is also.” I whole heartedly agree! I used a Touch for years and when my phone died, I moved to an iPhone 4. The computer side is so central to my use I doubt I use 15% of my phone minutes and 2% of my texts.

Sacto_Joe

I’m – not so sure we’ll see margins drop all that much. It’s all about the “mix”, isn’t it? Apple sells plenty of iPads with high margins. If it sells more of those, then that’s a positive. Pretty much true with iPhones as well, BTW.

Walt’s right. We’re still a ways off from “end game” time. But right now Apple is looking very, very good at solidifying its lead into something close to permanent – more iPod-like than iPhone-like, if you will. As Walt said, the success, failure, or “meh” of Microsoft’s Win8 approach will mean a lot.

R. Roche

“The iPhone is a salesman hired by the network operator to sell mobile broadband service. He gets a healthy commission because he’s very good at it.”
“I’ve never used guidance as a data point in any of my analysis. I consider the primary purpose of guidance to be the protection of management from shareholder lawsuits.”

Gems like these two are why I read this site.

R. Roche

“The iPhone is a salesman hired by the network operator to sell mobile broadband service. He gets a healthy commission because he’s very good at it.”
“I’ve never used guidance as a data point in any of my analysis. I consider the primary purpose of guidance to be the protection of management from shareholder lawsuits.”

Gems like these two are why I read this site.

http://kaizenity.blogspot.com/ FalKirk

“Gems like these two are why I read this site.”-R. Roche

As brilliant as Horace is, I aslo read this site for the comments (like yours). One of the few sites where the commentators come to learn and share instead of to lecture and insult.

Iain

Falkirk,

Well said.Trolls either give up or get a quick education. We are both very nice, accommodating and ‘suffer not fools gladly”.

Gprovida

I find the adjectives used on Apple’s quarterly performance interesting. A huge company is posting consistent growth performance like a start up over 4-5 years or 20+ quarters and numbers like 7% and 11% are considered “low.” I know this is being done with reference to Apple as the baseline, but somehow the message fails to capture the entirely new realm of performance that Apple achieves. Perhaps this explains investors and others confusion on how to approach Apple, apply traditional measures against a company this large and explosive is unprecedented, applying music and movie industry “blockbuster” model is woefully in adequate, startup sort of works but on this scale, … its just hard to really get one’s head around this. I wonder if the Asymco conference addressed this?

Kyle S

Horace – does the Mac y-o-y performance indicate how much share iPads are taking from laptops? That seems like the simplest way of interpreting that data.

Janne

I think the sales is mostly affected by the lack of hardware-updates recently, while year ago there were substantial updates, which boosted sales then.

http://www.asymco.com Horace Dediu

iPad may have contributed but there were no new Macs recently and there was a huge quarter a year ago so average growth would be hard even without the iPad.

ChKen

Total lack of the typical MBA refresh in the quarter.

Vas

Wasn’t the Q112 Mac growth 7%, not 2%?

Tatil

Revenue vs. units?

http://www.asymco.com Horace Dediu

This table measures revenues not units.

oases

For how long can Apple keep growing the bottom line at a greater pace than the top line? I don’t know how they do it. Something has to give…but it’s damn impressive.

ChKen

I dunno, I hope scale gives them more efficiency. Bottom line growing faster than top seems to be logical.

iObserver

@oases:disqus
There are several reasons for this.iPhone units increasing at aprx 100% yoy with higher margin than other products.
iPad units increasing at aprx 150% yoy with higher margin than products (exlucing iPhone)
mac increasing in single digits having much lower margin than iPhone and iPad
iPod unit sales decreasing, with much lower margins than iPhone and iPad

These are all reasons bottom line would increase faster than top line. Until iPhone and iPad sales decrease to be inline with mac growth (never?) the top line will grow slower than the bottom line.

It’s called operating leverage. Operating costs (largely, number of employees) grow much slower than revenue. Will continue until revenue growth is slower than employee growth.

ChKen

In the chart, I like to look at the numbers YOY, as opposed to sequentially. So, this year’s 2nd Q earnings growth of 94% is on top of last year’s 92% earnings growth, which is on top of the year before’s 86% earnings growth! Astonishing!

http://www.jaapwillem.com/ Jaap Willem

Related to the slow growth of software, would it be safe to say that´s it´s an effect from the lower prices in the App store for their software packages?

http://www.asymco.com Horace Dediu

It may be that the decrease in price for iWork did affect that line item but overall that line suffered from the decline in OS X and pro software pricing.

http://www.jaapwillem.com/ Jaap Willem

thanks for your feedback.

sigaba

Did Apple give a clue for ASPs for iPad and iPhone in the call? I’ve heard that iPad ASP has been declining, dunno how to relate that exactly to the RIM scenario, particularly considering Apple’s greater reliance on non-US markets…

Simon

iPhone ASP stayed about the same where as iPad fell to the mid 500. The cheap iPad 2 probably had a significant effect on the ASP since iPad 3 didn’t add a new more expensive version.

I don’t see much parallel to the RIM scenario. RIM was getting beaten badly in the higher price bracket and the more lucrative North American market, and hid that with the international growth. No such thing is happening with Apple. Based on the last report their dominance in the North American market is even greater than before. I fully expect the ASP to go down even more when they release something to compete against Kindle Fire though.

ChKen

In the press release on the Apple website, they have a data PDF, that breaks down ASPs by product line, as they give units and rev totals. Do the math, and voila, ASPs. The iPad obviously went down by about 8% due to the new pricing mix, with a $399 iPad2 being particularly attractive to schools.

http://www.asymco.com Horace Dediu

Revenue per iPad has declined. It was discussed on the conference call and I discussed on Critical Path. The mix of older generation iPad 2s is much higher than older iPhones in the iPhone total. The lower price point for iPad was resonating with education buyers.

Richard

Horace,

These guys at http://technologyspectator.com.au/apples-consistent-growth-trajectory?&utm_source=exact&utm_medium=email&utm_content=34767&utm_campaign=kgb&modapt=commentary have copied your post exactly.

1. I’ve heard in various places that the ramping of iPad is faster than the original ramping of iPhone – 150% vs 100% (including from you I believe). But the first four y/y Qs of iPhone vs iPad in your table tell a different story. Just wondering how to reconcile – are the ramping statistics simply in different units (number of iPhones or iPads sold instead of revenue)? Or is iPad not ramping faster than iPhone?

3. I believe the green should be a slightly darker shade for the 30-49% range starting in Q311.(Just to bring your table to perfection; although perhaps it’s just an optical illusion.)

http://www.asymco.com Horace Dediu

Regarding the ramp, the growth for the iPhone does show very large numbers but they were off a very low base. The iPad launched at far higher volumes and has maintained a higher rate of “average” growth.